The paper analyzes the consumption-real exchange rate anomaly in a multi-country model with complete markets under various preference specifications: (i) standard time-additive preferences; (ii) recursive preferences of Epstein and Zin; and (iii) habit formation preferences of Campbell and...

In this paper, we analyse the relationship between the currency carry return and volatility and liquidity risk factors. We find that both categories of risk factors are relevant to understanding and explaining carry return, with an outperformance for volatility ones especially the global FX...

This paper studies the impact of political risk on exchange rates. We focus on the Brexit Referendum as it provides a natural experiment where both exchange rate expectations and a time-varying political risk factor can be measured directly. We build a simple portfolio model which predicts that...

Firstly, we show that domestic prices of net importer countries incorporate a risk premium, driven by higher moments of future nominal exchange rate returns and secondly, using US dollar exchange rates against three currencies of major net exporting countries to the US such as Canada, Japan and...

We examine the causal relationship between US monetary policy shocks, exchange rates and currency excess returns for a sample of eight advanced countries over the period 1980M1 to 2022M11. We find that the dynamics of the US dollar exchange rate is the main driver of currency excess returns. The...

We describe a novel currency investment strategy, the ‘dollar carry trade,’ which delivers large excess returns, uncorrelated with the returns on well-known carry trade strategies. Using a no-arbitrage model of exchange rates we show that these excess returns compensate U.S. investors for...

We find important differences in dollar-based and dollar-neutral G10 carry trades. Dollar-neutral trades have positive average returns, are highly negatively skewed, are correlated with risk factors, and exhibit considerable downside risk. In contrast, a diversified dollar-carry portfolio has a...

We study empirically the relation between currency excess returns and macro uncertainty, measured as forecast dispersion, on a wide set of economic indicators. We find that investment currencies deliver low returns whereas funding currencies offer a hedge when current account uncertainty is...

We examine the relation between disclosure quality and information asymmetry among market participants following an exogenous shock to macroeconomic risk. In 2015, the Swiss National Bank abruptly announced that it would abandon the longstanding minimum euro‐Swiss franc exchange rate. We find...

The exchange rate level is priced within the consumption model. Risk premia arise endogenously from covariance with future consumption. By arbitrage, and in efficient markets, all risks in the exchange rate are replicated from inflation-linked bonds, except the risk of permanent real exchange...